Internatıonal Economıcs II (ENG) — Ünite 1 Soru-Cevap

David Ricardo, a Classical economist, is credited with introducing the theory of comparative advantage in international trade. He published his seminal book, "The Principles of Political Economy and Taxation," in 1817, in which he introduced this theory.

Potential benefits of globalization:

• Increased competition leading to better products at lower prices.
• Access to a broader range of resources.
• Economic growth.
• Transfer of world knowledge and technology.
• New employment opportunities.
• Increased flow of capital.

Loss of jobs in local industries, Disproportionate growth of incomes leading to increasing inequality both across countries and within countries and environmental problems in developing countries.

• The United Nations.
• The World Bank.
• The World Trade Organization (WTO).
• The International Monetary Fund (IMF).
• The European Union.

The volume of trade in the world economy has steadily expanded as a percentage of World GDP, growing from about 25 percent in 1970 to about 60 percent in 2021.

The World Trade Organization (WTO) was founded in 1995 in Geneva, Switzerland, as a result of the Uruguay Round Negotiations (1986-1994). The main objectives of the WTO are to help its members use trade as efficiently as possible to raise living standards and create jobs, and to ensure that trade flows as smoothly and predictably as possible by providing a forum for members to negotiate and resolve their trade problems.

The World Trade Organization (WTO) currently has 164 members, with 117 of them being developing countries or independent customs areas.

The extent to which a country engages in trade is often measured by the degree of openness in goods markets, which is calculated as the ratio of the sum of imports and exports to a country’s GDP. This measurement indicates the degree of openness in goods markets in a country.

Large countries such as the USA and China have a relatively smaller volume of trade as a share of their GDP compared to smaller countries like the Netherlands or Türkiye because the size and diversity of domestic markets in these large countries can effectively satisfy many production needs.

In Turkey, from the 1960s towards the early 1980s, the economy was virtually a closed economy, with a small share of trade volume in GDP, at about 10 percent in the 1960s and about 15 percent in the 1970s.

Following the early 1980s, with new neoliberal policies to integrate the Turkish economy into the rest of the world, there were surges in the volume of exports and imports. However, the volume of imports consistently exceeded the volume of exports, leading to a steady trade deficit with the rest of the world, except for short periods.

In 2001, Turkey experienced a domestic financial crisis, including a significant devaluation in the Turkish Lira, leading to a sharp decline in the volume of imports and a decline in the growth of production. In 2009, the impact of the Global Financial Crisis of 2007-2008 led to a decline in both the volume of imports and the volume of exports due to the fall in worldwide demand. In 2020, the COVID-19 pandemic caused massive drops in worldwide demand, resulting in a record rate of decline in the volume of exports in Turkey.

International finance deals with the exchange or flow of assets across nations, including transactions in currencies, equities, government bonds, corporate bonds, and real estate among governments, individuals, or firms. In contrast, international trade concerns the flow of goods and services across nations.

Foreign Direct Investment (FDI) occurs when a firm or enterprise acquires shares of a foreign firm or enterprise at 10 percent or more, implying a voting power and thus managerial influence over the foreign firm or enterprise. In contrast, portfolio investment entails passive or hands-off ownership of assets.

The top contributor country to the stock of FDI in Turkey so far is the Netherlands, followed by Germany, Singapore, and Qatar. Other notable countries include the UK, Luxembourg, Russia, Switzerland, France, and Spain. Most of these countries are also the countries with which Turkey has a high volume of trade, indicating a strong relationship between FDI and trade volume.

One of the pitfalls of globalization is the interconnectedness of countries, where a problem or crisis in one country can cause a ripple effect and spill over to other countries, leading to a more significant and complicated problem. This interconnectedness can exacerbate financial crises as they spread through the global financial system, disrupting the market's capacity to allocate capital internationally.

According to Eichengreen and Portes (1987), a financial crisis is "a disturbance to financial markets, associated typically with falling asset prices and insolvency among debtors and intermediaries, which spreads through the financial system, disrupting the market’s capacity to allocate capital within the economy."

Hyperinflation is defined as a period during which there are rapid, excessive, and out-of-control rises in the price level in a country, typically at 40 percent or more annually. Notable examples of hyperinflation in recent history include:

• In Zimbabwe, daily inflation reached 98 percent in November 2008.
• In Yugoslavia, it reached 65 percent in January 1994.

A currency crisis involves large devaluations or sharp depreciations of the domestic currency, usually following a speculative attack on the currency. On the other hand, a balance of payments crisis consists of a significant fall in international capital inflows into the country or a sharp reversal in capital flows to a country, also known as sudden stops. Both crises may lead to devaluations or sharp depreciations of the domestic currency.

What are banking crises, and why are developed countries also at risk of experiencing them?

A bank run occurs when a bank's customers lose confidence in the bank's stability and withdraw their deposits en masse. This can lead to a banking crisis because as more people withdraw their deposits, the likelihood of the bank defaulting or becoming insolvent increases, which further encourages withdrawals, creating a self-fulfilling prophecy.

External debt crises occur when countries default on their debt obligations to foreign lenders or undergo substantial debt restructuring. A notable example is the Mexican crisis in 1982, where Mexico announced it would stop servicing its foreign currency debt, leading to a capital flight. Domestic debt crises occur when national governments default on their debt obligations to domestic lenders. These crises are often triggered by previous surges of foreign capital inflows.

Contagion in economics refers to the rapid spread of an economic crisis from one market, country, or region to another. It can occur at both the national and international levels. Examples of international contagion  include the Tequila effect of 1994-1995, which refers to the spread of the Mexican crisis to other Latin American economies, the Asian flu of 1997, which denotes the spread of the 1997 Thai crisis to other Asian economies, and the Russian virus of 1998. An example of domestic is the collapse of Lehman Brothers in the United States amid the Global Financial Crisis in September 2008.

The consequences of contagion on the affected countries can be severe and include:

• Declines in asset prices
• Increase in the cost of borrowing
• Scarcity in international capital
• Fall in the value of domestic currencies
• Economic output may also decline.

The trigger for the Global Financial Crisis of 2007-2008 was the fall in housing prices in the United States and the subsequent inability of borrowers to repay their housing loans. This crisis originated in the financial sector in the United States in mid-2007. Housing prices peaked in mid-2006, creating a housing bubble, during a period of rapid supply growth due to a positive economic outlook. However, when the housing bubble burst and house prices began to fall, many borrowers defaulted on their loan repayments, leading to initial strains on the financial system.

The economic impacts of the Global Financial Crisis were significant. In advanced economies, GDP contracted by about 3.3 percent in 2009. In developing economies, GDP growth declined to about 3.2 percent, and globally, GDP growth declined to -1.3 percent in 2009. These figures indicate the severity and widespread nature of the recession caused by the crisis.

The world economy has encountered significant challenges as a result of the COVID-19 pandemic, including a worsening of inequality within and across countries. Emerging economies, in particular, have been deeply affected, with underlying weaknesses in these economies being exposed and exacerbated. According to the World Bank (2022), households and businesses were largely unprepared for income or revenue loss, with studies showing that the average household in both emerging and advanced economies could only sustain basic consumption for up to three months of income loss, and the average business could cover only up to 55 business days of cash expenses.

High-income countries mobilized fiscal resources in large amounts, with the fiscal response as a share of GDP being historically high. In contrast, low-income countries struggled to mobilize resources, and their fiscal response as a percentage of GDP was significantly smaller, or even non-existent. This discrepancy in fiscal response has led to concerns about government debt sustainability, particularly in emerging economies.